Qualifying & process

Short sale

A sale in which the lender agrees to accept less than the mortgage balance because the home is worth less than is owed, letting a struggling owner avoid foreclosure.

Sources

What does short sale mean?

In a short sale, an owner who owes more than the home is worth sells it with the lender's permission for less than the loan balance, and the lender writes off the shortfall. It is slower and more complex than a normal sale because the lender must approve, but it damages credit less than a foreclosure and releases the owner from an underwater loan. It is a last resort when payments are no longer sustainable.

How a short sale works, step by step

The owner can no longer afford the loan and the home is worth less than the balance owed.

The owner lists the home and submits a hardship package — income, expenses, a hardship letter — to the servicer.

A buyer makes an offer, which the lender must approve; approval often takes weeks to several months.

At closing the lender takes the sale proceeds and releases its lien, typically leaving the seller with no equity.

The lender either forgives the shortfall in writing or keeps the right to pursue it as a deficiency, depending on the agreement and state law.

Short sale vs. foreclosure

For the homeowner a short sale is usually the softer landing: it ends the debt on agreed terms, avoids a forced sale, and the waiting period before qualifying for a new mortgage is generally shorter — about four years for a conventional loan after a short sale versus seven after a foreclosure, with FHA and VA rules shorter still.

For buyers, short sales can be good value but slow and uncertain; the lender can counter, delay or reject, and homes are typically sold as-is. Get a financing contingency long enough to survive the bank’s review.

Frequently asked

How does a short sale affect your credit?

A short sale hurts your credit, but generally less than a foreclosure, and the waiting period to buy again is usually shorter. It also releases you from an underwater loan, which is why it is often the better of two difficult options.

Is a short sale better than a foreclosure?

For most homeowners, yes. A short sale settles the debt on negotiated terms, usually does less damage to credit, and shortens the wait before you can qualify for a new mortgage — about four years for a conventional loan versus seven after a foreclosure. Get any forgiveness of the remaining balance in writing.

Does the seller get any money in a short sale?

Generally no. The sale proceeds go to the lender because they fall short of the loan balance, so the seller walks away without equity.

Some lenders or programs have offered a modest relocation payment, but it is not guaranteed and must be approved as part of the short-sale agreement.

How long does a short sale take?

Often several months. After a buyer makes an offer, the lender must review the hardship package and approve the price, and that review alone can take weeks to months — longer if there is more than one lien. Buyers should expect delays and write a long enough financing contingency.